Proposed legislation introduced by Governor Patrick to eliminate most forms of non-competition agreement in Massachusetts may be enacted before July 31, 2014. This legislation creates significant risks for employers with employees in Massachusetts who are currently subject to non-competition agreements.
On April 10, 2014, Massachusetts Governor Deval Patrick filed legislation to generally ban employers from implementing non-competition agreements. If enacted in its current form, the legislation would take effect immediately and apply to existing non-competition agreements that are currently valid and enforceable under Massachusetts law. As a result, current employees who are now prohibited from competing would be able to terminate employment and immediately establish or join a competing business. The Patrick administration has framed the legislation as a way to make it easier for workers in the technology and life sciences fields, where non-compete agreements are commonly used, to move from job to job and increase innovation.
Governor Patrick’s legislation—referred to as House bill 4045—was sent to the Joint Committee on Economic Development and Emerging Technologies on April 14, and a public hearing on this matter was held on May 29. Moreover, the Joint Committee on Labor and Workforce Development recently took action to advance another proposal with the same objective. On April 30, it voted favorably to advance House bill 4082, which would codify the Uniform Trade Secrets Act (the UTSA) in Massachusetts, including the specific language in the UTSA prohibiting non-compete agreements under certain circumstances. Significantly, however, the UTSA expressly provides for the ability to obtain injunctive relief for threatened trade secret misappropriation, unlike the current statutory regiment under which actual misappropriation of trade secrets must be established. Massachusetts would become the 49th state to adopt the UTSA.
The fate of this legislation remains uncertain as there are many procedural hurdles to clear before a bill is signed into law. Specifically, any legislation that contemplates this issue must be acted upon by July 31, 2014, as this is the date when “formal sessions” of the legislature conclude. After that date, any one member of the legislature can object for any reason to a bill moving forward. Here, there are interested parties who have expressed concerns about the proposed changes, including the Associated Industries of Massachusetts. Accordingly, it is very likely that a legislator would object to this bill advancing after July 31. As a result, any significant movement on this issue will likely occur by July 31, 2014, if not sooner.
If this legislation is enacted, the news is not all bad for employers. Current proposals allow employers to use forfeiture clauses so that employees are not able to keep incentive and equity compensation if they then leave and compete with their former employer. As a result, employers may want to consider using forfeiture clauses now as a standard part of these arrangements in advance of any legislation. It may also be possible to extend a forfeiture clause to prior awards for additional consideration, such as a new equity award. Employers may also continue to use covenants not to solicit or transact business with existing customers as well as covenants not to solicit or hire its employees. These covenants along with enhancing confidentiality provisions will take on greater significance if non-competition agreements cannot generally be used going forward. In light of the foregoing, it is prudent at this time to take a fresh look at these provisions to consider how they may be strengthened or expanded.
We will continue to monitor the progress of this legislation and any other developments on this issue as it evolves in Massachusetts and other states. If you have questions about this legislation, its potential impact on your business or how you may prepare for it, please contact your regular McDermott lawyer or an author.